Irreconcilable Positions

Greece owes the Troika over €11 billion in bailout repayments through the end of July. Greece is unable make those payments unless the Troika releases the funds.

Position 1: “We need a big debt restructuring, no more kicking the can,” says Greece’s Minister of State.

Position 2: Germany offers a possibility of unspecified debt relief, at a future point in time, only if necessary. First, Greece must make another round of budget cuts on top of the pension cuts its just made.

Greece has caved in every time, and in the most humiliating ways. Greece even caved in on pension cuts last week.

Why should anyone believe Greek demands now?

Please consider Greek Bailout Deal Must Have Concrete Debt Relief, State Minister Says.

Greece will not accept a bailout deal without a concrete agreement for debt relief from the country’s European creditors, a top aide to Prime Minister Alexis Tsipras said.

“We want real solutions, not interim solutions,” Nikos Pappas, Greece’s Minister of State, said in an interview Friday after several days of talks with senior U.S. officials. “No more kicking the can down the road.”

Without fresh bailout funds, Greece faces bankruptcy in July at the latest. That could revive risks across the eurozone, which is already grappling with a migration crisis, a movement in the U.K. to leave the European Union and the rise of populist parties across the continent.

European powerhouse Germany is pushing Greece and the IMF to accept another bailout agreement based on possible debt relief in the future. The fund, trying to regain credibility it lost in the first two failed Greek bailouts, is taking a firm stand on debt restructuring.

“There are disagreements between the IMF and our European partners,” Mr. Pappas said. “But we have made our position clear that we need a big debt restructuring.…There should be no delay.”

U.S. Treasury Secretary Jacob Lew said Friday he’s pushing Germany to accept some form of restructuring. “I have very much communicated to all the parties that debt relief is necessary,” he said.

But Mr. Lew signaled that the IMF and Greece would also need to compromise. The IMF is pressing for Greece to commit to wage and pension cuts if the country doesn’t meet its budget targets in the coming years. Athens has instead said it would approve across-the-board reductions in spending, a proposal the fund says isn’t credible.

Greek Threats Credible?

Greek threats are not credible. Greece has little say in this matter. Nor does U.S. Treasury Secretary Jacob Lew.

However, there is a major difference this time. The IMF wants debt haircuts or it threatens to back out of the deal.

Germany’s insistence all along is the IMF must remain a partner.

This is a battle between the IMF and Germany. No one else’s opinion counts.

Greece Short-Term Debt Timeline

Can Greece come up with €11,235,558,147 in June and July?

Of course not. That is not the way the “bailout” works.

In practice, the Troika gives Greece the money and Greece hands the money right back to the Troika plus a tiny bit extra from now until 2059.

The repayment calculation assumes Greece can maintain a budget surplus of 3.5% of GDP from 2017 until then, a ridiculous belief to say the least.

Greece Long-Term Debt Timeline

Total Debt Owed

• EFSF: €131 Billion
• Eurozone Governments: €53 Billion
• Private Investors: €36 Billion
• ESM: €25 Billion
• ECB: €20 Billion
• Treasury Bill Holders: €15 Billion
• IMF: €14 Billion

Synopsis

1. Greece needs to come up with €11,235,558,147 thru the end of July.
2. Under the current “bailout” scheme, Greece needs to repay nearly€300 billion between now and 2059.
3. Starting 2017, Greece is supposed to run a primary account surplus of 3.5% through 2059.
4. The IMF proposes a primary surplus of 1.5%. That proposal, stand-alone would stretch debt payments well beyond the already ridiculous 2059 date.
5. In conjunction with a new primary surplus target of 1.5%, the IMF threatens to back out of the whole deal unless there is debt relief.
6. Realistically, Greece is not going to maintain a primary surplus of 1.5% either.
7. Germany does not want debt relief and its constitution does not allow transfer mechanisms.
8. The ECB which is owed €20 billion, most of that due in the next three years, cannot allow debt relief on its portion.
9. Merkel does not want another crisis on top of the Greek refugee crisis she has now.
10. The EU does not want another crisis ahead of the Brexit vote.

Another Greek Bluff? An IMF Bluff?

On its own, Greek demands are meaningless, unless this isn’t a bluff.

Would Greece walk away this time after what we have seen in the past? Is Greece secretly printing Drachmas?

Regardless, something has to bend (or break), if the IMF genuinely sticks to its guns.

If the IMF does back out, would Germany enforce the terms of the deal as demanded by the third bailout?

There are a lot of questions here and no one really knows how far Germany will bend or how firm the IMF will be.

Another Can-Kicking Exercise?

Despite Greece’s demand “We need a big debt restructuring, no more kicking the can”, the most likely outcome is a trivial debt restructuring “can kicking” compromise to get past the Brexit vote.

“Likely” and “guaranteed” are not the same. There are other forces in play: the refugee crisis, Brexit, Merkel’s declining popularity.

Unless Greece is willing to return to the Drachma, this squabble is between Germany and the IMF.

After seeing one can kicking exercise after another, after another, for years on end, and after the amazing cave-in by the Greek government that lead to the third bailout, no one seems remotely concerned this effort will fail.

Perhaps this is the effort that fails or at least leads to a major position change by Germany. The outcome may come down to this question:

Is the IMF bluffing, or is it serious?